The Problem With The VC Tax Loophole Isn't That It Provides Bad Incentives. It's That IT'S A LOOPHOLE.

Jose Ferreira has
an interesting take on why the carried interest loophole
should be kept open for venture capitalists, but not for other
forms of private equity:

The law is flexible enough to carve out an exemption for VCs.
Buy-out investing is all well and good -- it's better for the
economy than hedge fund investing -- but it's not nearly as long
term GDP-accretive as is venture capital. And venture capital is
a distinct American competitive advantage, the envy of Europe and
Asia.

He frames his argument as a response to two anomalies in the
carried interest debate: Chris Dixon and Fred Wilson, venture
capitalists who favor raising their own taxes. Fred, Jose says,
argues that "the best managers will be more inclined to invest
their own money" if the loophole is closed, while Chris asks why
VCs should pay lower taxes than firemen, who earn far less money.

This is a reasonable enough response to those arguments. And they
aren't quite straw men -- Fred and Chris really did say those
things, or something like them.

But they only said those things because they were tired of saying
-- over and over again, until they were both blue in the face --
that the carried interest loophole should be closed because
it is a loophole. VCs receive a percentage of what their
funds earn in exchange for their services, rather than as a
return on capital they put up. That's income. It's
performance-based income, to be sure, but it is most certainly
not capital gains.

Fred and Chris have both made this point at great length. But it
doesn't really take much length to make it, so they went on to
make numerous other points about how the consequences of ending
the loophole would be largely beneficial. Which may be true, but
is far more difficult to establish, and impossible to prove. So
proponents of the loophole are happy to make that the
argument.

But it's completely irrelevant. Our tax code is, unfortunately,
filled with all sorts of complexities and loopholes, some of
which are designed to provide incentives that -- we hope -- will
make us all better off. But one thing we don't do is set
personal income tax rates based on how good for the economy we
think someone's job is.